Pillar 3 Disclosures Page 1 of 35 Hewlett-Packard International Bank Plc Hewlett-Packard International Bank Holding Limited Capital Requirements Directive Pillar 3 Disclosures Code of Conduct for Basel II Pillar 3 Disclosures Medium Enterprises October 2014
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Pillar 3 Disclosures
Page 1 of 35
Hewlett-Packard International Bank Plc Hewlett-Packard International Bank
Holding Limited
Capital Requirements Directive Pillar 3 Disclosures
APPENDIX 1 - OWN FUNDS DISCLOSURE APPENDIX 2 - OWN FUNDS AND AUDIT FINANCIAL STATEMENTS RECONCILIATION APPENDIX 3 - CAPITAL INSTRUMENTS DISCLOSURE
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Section 1: Overview 1.1 Business Overview Hewlett-Packard International Bank (“HPIB” or the “Bank”) was incorporated on 1 July 1998 and holds a banking licence in Ireland. The Bank is a captive leasing company of Hewlett-Packard Company (“HP Co.”). In the previous year the Bank was a subsidiary of Hewlett-Packard Financial Services Holding. In the current year, a new structure was put in place wherein Hewlett-Packard International Bank Holding Limited (HPIBHL) became the new parent of the Bank. This change in structure came into effect on 29 September 2014. The ultimate holding company of the Bank remains unchanged as Hewlett-Packard Company, incorporated in the United States of America. The primary activity of the Bank is the provision of leases & loan facilities, rentals and asset management capabilities to clients of Hewlett-Packard to finance the acquisition of Hewlett-Packard products, which may be integrated with third party products. In addition, the Bank provides back office facilities for other Hewlett-Packard entities. The only activity for HPIBHL is its investment in HPIB. 1.2 Capital Requirements Directive The Capital Requirements Directive (Directive 2006/48/EC) also known as the
Basel Accord is a complex standard for capital adequacy of banks worldwide.
Prior to January 2014, the Bank was subject to the capital requirements of
Basel II. Effective 1 January 2014 Basel III was implemented by HPIB.
The Basel framework consists of three “pillars”. The three pillars are designed
to promote market discipline through the disclosure of key information about risk
exposures and risk management processes.
Pillar 1
Sets out the minimum capital requirement firms are required to meet for credit,
market and operational risk.
Pillar 2
Requires banks to have an internal capital adequacy assessment process and
requires that banking supervisors evaluate each bank’s overall risk profile as
well as its risk management and internal control processes.
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Pillar 3
To encourage market discipline through disclosure requirements which allow
market participants to assess the risk and capital profiles of banks.
The Basel III Pillar 3 disclosure requirements are specified in Part 8 of the Directive EU575/2013. 1.3 Disclosure Policy: Basis and Frequency of Disclosure HPIB is not consolidated into HPIBHL for accounting purposes. It is subject to consolidated regulatory supervision by the Central Bank of Ireland. There are no practical or legal impediments to the prompt transfer of capital between HPIBHL and HPIB. In line with CRR requirements the figures in the tables below relate to the consolidated HPIBHL position. Due to its size HPIB comprises almost 100% of the total capital requirements of the consolidated group. HPIBHL’s sole purpose is to act as a holding company for the Bank. Therefore to reflect the risk profile of the Bank the qualitative information below has been presented on an individual basis. Where possible, information contained in this disclosure document is for the year ended 31st October 2014. However some disclosures are reported based on data gathered for the quarterly submissions to the Central Bank of Ireland as at 31st December 2014. The disclosures will be reviewed and published on an annual basis. 1.4 Location and Verification The disclosures are published on the HP corporate website: http://www8.hp.com/ie/en/hp-financial-services/info/legal.html After the 1st November disclosures will be published on the HP corporate wesite:- http://www8.hpe.com/ie/en/hp-financial-services/info/legal.html The information contained in this disclosure has not and is not required to be audited by the Firm’s external auditors and does not constitute any form of financial statement. These disclosures are subject to internal review and validation prior to publication.
Section 2: Own Funds - Capital Resources 2.1 Summary of HPIB’s approach to assessing the adequacy of internal capital to support current and future activities Historically HPIB has been, and continues to be, predominantly financed by
capital and holds a Letter of Comfort from its parent confirming continued
parental support.
HPIB has a formal internal process for assessing its internal capital adequacy.
This consists of the annual Strategic and Business Planning process. Board
and Senior management committees such as the Asset & Liability Sub-
committee (“ALCO”) and the Pricing and Residual committee meet regularly to
consider the adequacy of HPIB’s capital.
Annual Strategic and Business Planning Process The HPFS annual Strategic and Business Planning process involves the HPFS
Global Marketing Council (the HPFS EMEA Director of Marketing and Business
Development is a member of this council) reviewing:
The status of the HPFS strategic initiatives for the current year - focusing
on 1) the status of the initiatives, 2) customer profiles and needs, 3)
competition and challenges and 4) future plans
The HP Co. strategic plans for the next year/future years
Market analysis i.e. IDC and Gartner market analyses with particular
focus on the IT industry.
From these reviews high level strategies for HPFS for future years are
formulated. 80% of these strategies are HPFS global strategies with 20%
regional (EMEA) specific. The draft strategies are presented to the HPFS
Global Leadership team (GLT). The HPIB Managing Director is a member of
this team. The GLT provides feedback on the strategies to the HPFS Global
Marketing Council.
The Marketing and Business Development team create detailed plans for each
strategic initiative using the learnings from prior years, stakeholder inputs (HP
Co and the HPFS GLT) and market/HP internal changes. Key focus areas for
future years are documented and an owner allocated to each initiative. Key
activities, deliverables and measures of success are documented for each
initiative.
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The strategic initiatives are communicated to all HPFS staff, including HPIB, at
the start of year “Kick Off” sessions and updates on progress are provided
throughout the financial year.
Annual Business Planning Process
As an output of the annual Strategic and Business Planning process the annual
Business Plans are set for each HPFS geographic region including HPIB. The
HPIB Business Plan is drafted by the Financial Planning and Analysis
department within the HPIB Finance function and is prepared with a five year
horizon. The key elements to the plan are:
Base run-outs – these reports provide details of all existing deals booked
in HPIB’s systems and how they run-off in the P&L and balance sheet
over future years. The reports are available by country and currency.
New inceptions – the planning model streams out the P&L and balance
sheet for all new deals to be booked in future years. These are also
prepared at a currency/country level. A detailed planning and
consultation process takes place to ensure that valid assumptions are
taken with regard to new business written. Growth targets are
determined and target margins are set out in conjunction with the Pricing
department. Assumptions are also made regarding foreign exchange
(“FX”) and interest rates with guidance from HPIB’s Treasury
department.
Asset Management targets are mainly based on lease expiration values,
together with customer specific data. These targets are set at a country
level together with the Asset Management Leader.
Bad debt assumptions are determined by the Credit department and are
set as a percentage of portfolio assets.
Inputs for interest income and expense (based on balance sheet cash /
debt level assumptions) and FX gains and losses are obtained from the
Treasury department.
Administration expenses are prepared for each function in consultation
with the function leader.
Taxation charge is agreed with the Tax department based on effective
taxation rates.
Once all inputs have been obtained and P&L and balance sheet plans
prepared, these are reviewed by HPIB senior management prior to completion
and approval.
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Action plans are put in place to ensure HPIB meets its Business Plan, one of
the plans is to ensure sufficient capital is available to meet the projected
balance sheet and business requirements and to ensure that capital usage is
optimised.
HPIB ensures that capital is optimised through its risk management processes,
The HPIB governance structure ensures that the HPIB Board of Directors (the
“Board”) and the Board Committees and Sub-committees identify, monitor and
review each of the above risks. The management committees – Operational
Excellence Council, Credit and Investment Committee and Pricing and Residual
Committee manage the risks on a day to day basis via business metrics.
The Board reviews and approves the HPIB Business Plan on an annual basis.
Each month senior management reviews HPIB’s performance against the
Business Plan and the quarterly performance against plan is presented to the
Board.
Also ALCO meets quarterly to consider the adequacy of HPIB’s capital to
ensure that both working capital and regulatory capital requirements are met.
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2.2 HPIB & HPIBHL Own Funds Year End Own Funds
HPIB HPIBHL
31-Oct-14 31-Oct-14
US$'000 US$'000
Tier 1 Capital
Share Capital 10,036 1
Capital Contribution/Other Reserves 1,662,479 1,672,514
Revenue Reserves 888,825 888,825
Add back loss on Cash Flow hedges 6,575 6,575
Total Tier 1 Capital 2,567,915 2,567,915
Tier 2 Capital
Portfolio provision 32,587 32,587
Total Capital 2,600,502 2,600,502 Own Funds at 31st December 2014
HPIB HPIBHL
31-Dec-14 31-Dec-14
US$'000 US$'000
Tier 1 Capital
Share Capital 10,036 1
Capital Contribution/Other Reserves 1,662,479 1,672,514
Revenue Reserves 888,825 888,825
Add back loss on Cash Flow hedges 6,575 6,575
Total Tier 1 Capital 2,567,915 2,567,915
Tier 2 Capital
Portfolio provision 21,413 21,413
Total Capital 2,589,328 2,589,328 Tier 1 capital comprises of share capital and reserves. Tier 2 consists of general provisions. The following table shows the overall Pillar 1 minimum capital requirement and risk weighted assets under the Standardised Approach to Credit and Operational Risk.
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Own Funds Capital Requirements at 31st December 2014
HPIB HPIB HPIBHL HPIBHL
8% Own
Funds Capital
Requirement
Risk
Weighted
Assets
8% Own
Funds Capital
Requirement
Risk
Weighted
Assets
US$'000 US$'000 US$'000 US$'000
Central governments or central banks 459 5,743 459 5,743
Loans and advances to customers 5,003 24,111 51,958 1,603,006
Other assets 220,800 - - -
Cash flow hedges 984 897 1,259 3,026
Derivatives at fair value 761 - - -
Amounts due from fellow subsidiaries 52,888 -
Total financial assets 896,509 61,731 180,802 2,636,964
Net liquidity surplus
Liabilities
Deposits by banks 344,178 67,598 - -
Deposit by customers (including debt securities in issue) 258,472 157,778 - -
Other liabilities 34,716 - - -
Accruals 17,194 - - -
Cash flow hedges 11,078 7,440 19,273 37,101
Derivatives at fair value 2,953 - - -
Amounts due to fellow subsidiaries 109,738 69,490 54,051 223,155
Total financial liabilities 778,329 302,306 73,324 260,256
Net liquidity surplus 118,180 (240,575) 107,478 2,376,708
More than 5 years Total
US$ '000 US$ '000
Assets
Cash and balances with Central Bank - 133,029
Loans and advances to banks - 457,462
Tangible fixed assets 5,180 1,226,002
Loans and advances to customers 54,770 1,738,848
Other assets - 220,800
Cash flow hedges - 6,166
Derivatives at fair value - 761
Amounts due from fellow subsidiaries - 52,888
Total financial assets 59,950 3,835,956
Liabilities
Deposits by banks - 411,776
Deposit by customers (including debt securities in issue) - 416,250
Other liabilities - 34,716
Accruals - 17,194
Cash flow hedges - 74,892
Derivatives at fair value - 2,953
Amounts due to fellow subsidiaries - 456,434
Total financial liabilities - 1,414,215
Net liquidity surplus 59,950 2,421,741
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5.2 Market Risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates and foreign exchange rates. The Bank reduces its exposure to market risk by entering into forward currency contracts which hedges any risk associated with foreign currency fluctuation.
Capital N/A N/A
Operating leases Fixed rate. The Bank is exposed to interest rate risk on the
portion of the balance sheet that is funded by debt; mis-
match approved by board
Balance sheet hedging process which is monitored
monthly
Liabilities
Bank and customer deposits Deposits are short term. Interest rate risk is minimised due
to the short average tenor of investments and deposits.
All investments are hedged as part of the Balance Sheet
FX risk management process.
Bank investments Investments are short term. Interest rate risk is minimised
due to the short average tenor of investments and
deposits.
All investments are hedged as part of the Balance Sheet
FX risk management process.
Finance leases & loans Fixed rate. The Bank is exposed to interest rate risk on the
portion of the balance sheet that is funded by debt; mis-
match approved by board
Balance sheet hedging process which is monitored
monthly
Assets Interest Rate Foreign
Exchange
5.3 Interest Rate Risk Interest rate risk arises when there is a mismatch between positions which are
subject to interest rate adjustment within a specific period. The Bank does not have a
trading book and all interest rate risk is in the banking book. At this time, the Bank’s
lease portfolios are primarily financed by the Bank’s capital resources. Where the
lease portfolio is not funded by capital resources it is funded by third party debt and
is therefore exposed to US dollar interest rate risk due to the duration mismatch
between Assets and Liabilities.
The effect on net interest income, and therefore profit before tax over a 3 year
period, of a 1 basis point shift in the yield curve would be as follows:-